40-year mortgage? That’s a lot of interest

Payments are lower, but you’ll pay a lot more in interest

LewSichelman

Realty Q&A is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 40 years, responds to readers’ questions on real estate.

CHICAGO (MarketWatch)—Question: Here’s an idea for a “new” mortgage. Since Americans are living 10 years longer or more since the 30-year fixed-rate mortgage was introduced in the 1930s, I believe a 40-year fixed-rate mortgage at current low interest rates (with the same tougher underwriting requirements in place)—for new homes only—would spark a significant growth in construction and all construction-related jobs, thus substantially increasing economic growth along with increasing homeownership availability for many who have been forced into lower-paying jobs. This might also give an upward impetus to the stock market and change the current fearful psychology pervasive in our economy.

Luxury golf communities' home values are falling, done in by rampant
overdevelopment, the economic downturn and waning interest in the sport. Photo: Zachary Bennett, Wall Street Journal.
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Politically, I think the first party to endorse this idea would have a hard time being defeated by the opposition. I hope I don’t come across as a “wacko” and would like to hear your comments on this idea. —S.C.

Answer: No, I don’t think you are a wacko. But I don’t think much of your idea, either. At today’s record low loan rates and suppressed prices, I don’t think affordability is the problem. I think the problem is that the pendulum has swung so far back the other way from no-down-payment, no-verification lending “rules” that most people have difficulty qualifying for financing. And that would remain the case under your scenario “with the same tougher underwriting standards.”

That said, a 40-year loan does have some advantages, the main one being that the payment is much easier on the pocketbook. On a $200,000 loan at 4%, the monthly payment over 30 years would be $954.83. But over 40 years, the payment would drop to $835.88, a savings of $118.95 per month.

The main drawback, of course, is that over 40 years, you’d pay a whale of a lot more interest. The total interest outlay on the 30-year loan above is $143,739.01. But over 40 years, the total interest cost jumps to $201,220.03. That’s a difference of $57,481.02, which is a big price to pay for something you probably can’t afford anyway if you need to amortize the payments over four decades so you can handle the monthly payment.

Also with a 40-year loan, it takes way longer to start building meaningful equity with your payments. You pretty much have to hope that the market will turn north and start picking up some speed. Otherwise, when the time comes to sell or refinance, you might not have much more in the place than what you put down years ago.

Of course, most people don’t keep their mortgages 30 years these days, let alone 40. So the fictional buyer above would probably move on to another house and another mortgage, or trade in his 40-year sucker for something more reasonable. However, there is no guarantee that rates won’t be so much higher that the cost of change could be too much to bear.

Nevertheless, if you believe this is a good product, you can probably find a lender or two or three who makes such loans. But for my money, I wouldn’t go any longer than 30 years. There’s a reason the 30-year fixed-rate mortgage has been the gold standard for a long time.

Question: I have a first mortgage with one lender and a home-equity line of credit with another. I live in Tucker, Ga. Would you please recommend a result-oriented short-sale agent in my local area? —E.B.

Answer: As I have written many times in this column, I cannot recommend specific agents, lenders and other professionals. I couldn’t even if I wanted; I am located in Washington, D.C., and have absolutely no knowledge of the Georgia marketplace.

But I can tell you that when you are interviewing potential agents to help guide you through the intricacies of a short sale, you should ask your candidates how many short-sale deals they’ve completed.

First and foremost, you want someone who has done at least a few, and several is even better. A short-sale is no time to work with rookies. Also ask for references—previous short-sale clients—and call them to discuss their experiences.

Good luck.

Question: Where would I go to get a complaint procedure for foreclosure cases? —J.C.

Answer: Anyone who is upset with the way their foreclosure was handled should go to independentforeclosurereview.com, a website set up by federal regulators where consumers can go to post their complaints. The “feds” are interested in hearing from anyone who believes they have been wrongfully foreclosed upon or have been treated unfairly and suffered financial harm as a result.

Nationally syndicated columnist Lew Sichelman has been covering the housing market for more than 40 years. MarketWatch readers are encouraged to send their real estate questions to him at lsichelman@aol.com. Answers will be presented in this column every Friday. However, because of the volume of email he receives, he cannot answer every reader’s query.

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